Presenting Chinese Wealth Management Product's Infinite 'Risk' Loop

While we explained - in detail here - the copper-financing-deals that are among the epicentric drivers of the credit crunch in China, there is an (albeit smaller) missing link. The so-called 'Wealth Management Products' that are discussed widely and yet little understood are basically higher yielding vehicles pitched to a greater-fool retail audience with the goal of reducing banks' risk at the behest of the PBOC. Of course that is not how these stuffed-to-the-gills-with-risky-development-projects deals are pitched to the investing public but they have allowed banks (and implicitly local governments) via the infinitely virtuous loop below to fund any and all things construction-based... until now. It seems that losses (step 5), risks (step 3), and illiquidty (step 6) are breaking the loop very rapidly and therefore implicitly lowering credit creation (and therefore growth) or driving credit demand even further into the shadows.

Simply put - the retail audience is becoming aware of the risks (Step 5 is breaking), Trust companies are increasingly illiquid and also unwilling to act as conduit carrying the short-term risk (Step 3), which stalls the recycling of deposits back into banks (Step 6) crushing the banks' ability to lend and keep the glorious growth cycle going...